ABCs of investing
Your retirement plan gives you the opportunity to make some of your own investment decisions. These investing basics may help you:
- Develop a regular savings habit
- Stay invested
- Understand the risk-reward relationship
- Consider the effects of inflation
Develop a regular savings habit
No one has figured out the best time to invest. You can take the guesswork out of it by making a regular fixed-dollar investment, for example, every month or every paycheck. This is called dollar cost averaging. If you’re contributing to your retirement plan, you’re probably already using this strategy.
Since the prices of mutual funds fluctuate, dollar cost averaging allows you over the long term to:
- Buy more shares when prices are lower
- Buy fewer shares when prices are higher
Dollar cost averaging can lower your average cost per share, but it doesn’t guarantee a profit or protect against loss. You should consider your willingness to keep investing when share prices are declining.
Stay invested
You may hear a lot of talk about timing the market, but successful investing is more about time than timing.
One of the advantages you get with time is compounding. Here’s how it works: When your investments produce earnings, those earnings get reinvested and can earn even more. The more time your money stays invested, the greater the opportunity for compounding and growth. Keep in mind that while compounding can make an impact over many years, there may be periods where your money won’t grow. While there are no guarantees, the value of compounded investment earnings can turn out to be far greater than your contributions over the long term.
Compounding your earnings
- This example assumes a hypothetical investment of $100 twice a month in Standard & Poor’s 500 Composite Index, 1983-2012, with monthly dividends reinvested. Earnings equal the account value less investor contributions. The S&P 500 is an unmanaged index with no expenses. Past results are not predictive of future results.
The key is to start investing as early as possible to get time — and compounding — on your side.
Understand the risk-reward relationship
When it comes to investing, the relationship between risk and reward is fairly simple: The greater the risk, the greater the opportunity for reward.
For many people, the biggest risk is losing money, so they look for investments they consider safe. An equally important risk is that your investments might not provide enough growth or income to allow you to meet your retirement needs.
Learn more about understanding risk and the potential for reward that comes with different types of investments.
Consider the effects of inflation
How many times have you heard, “When I was a kid, we only paid 50 cents to go to the movies”? The difference between that pocket change and what you would pay today is inflation at work. Over time, money gradually loses its buying power.
What does this mean for your retirement? A dollar today will be worth less 15 or 20 years down the road. Your retirement account needs to grow enough to overcome the erosion of inflation.
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Though levels of inflation ebb and flow, even relatively low inflation erodes your buying power if you have a fixed income after you retire. You can try to beat inflation by investing in funds that aim for returns that outpace rising costs over the long term.
Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional or downloaded and should be read carefully before investing.